Economic Terms

Is a growth model used in development economics that states an economy's growth rate is dependant on the level of saving and the capital output ratio. The theory states that developing countries have very low growth rates and therefore the standard of living does not advance rapidly, because of the fact that they have very low levels of saving and each unit of capital is very inefficient.

Below is a logical sequence of reasoning to illustrate that the more developed a country wants to be and the quicker the economy will grow is based on investment levels in infratructure products.

 

Here is a basic flowchart of how the HD model works. Countries with high savings rate will then provide lots of funds for investment for firms to increase the capital stock for a country and this in turn will lead to an increase in the growth rate of a country and as a result the level of national income/output will increase fuelling further savings and ultimately this cycle wil keep repreating itself.

Is a mathematical trade model that states that countries will specialise in goods that they have a relative factor abundancy in i.e. a country will export products produced using factors of production that they are relatively abundant in and import products where production requires the use of scarce factors.

Engage in private investments by trading securities on behalf of their clients by hedging against volatility and instability in financial markets. However as hedge funds have become more prominent so has the perceived risiness with them.

When a central bank directly finances a government budget deficit by printing more public money. This is an alternative form of the conventional public policy choice of monetary policy but often is overlooked due to the hyperinflation concerns that arise.

Is a term that applies to a trend often seen in investing, in which all investors tend to mimic each others actions and this causes asset prices to significanty decline or rise. These investors may not always be acting rationally.

Below is a graphic which shows the ramifications of asset prices falling due to herding effects. If asset prices fall this causes investors to lose a large value of their investments. Which ultimately can cause a financial crisis or a recession, as confidence from the financial sector drains away.

Goods where the features of products are heavily differentiated e.g smart phones and cars.

This is a special case of entry that exists in markets that are highly contestable. The lack of sunk costs and the ability to freely enter and exit means that new firms can enter the market and undercut the current incumbent firms to steal the abnormal profit. They can quickly leave the market costlessly before the incumbent has had time to react with a price match. This explains why markets that are classed as contestable, will often see incumbents charging a price close to the marginal cost to prevent being undercut.

Below illustrates the logical sequence of reasoning why incumbent firms keep prices extremely low despite the high degree of market power they have, as they are vulnerable to hit-and-run entry. By keeping prices low the profit rewards and incentives of hit-and-run entry is reduced and incumbent firms feel more secure in their market position. So peversely in these types of market the best way to maximise profits in the long-term is to make small profits in the short-term.

 

Is the government department responsible for for formulating and developing public finance and economic policy and controlled by The Chancellor of the Exchequer (currently George Osborne).

Her Majesty’s Revenue and Customs. Its main responsibility is the administration and collection of UK taxes.

Goods where the features of products are similar e.g gas and water.

If all firms produce exactly the same product there can be no price competition and only non-price competition such as product differentiation and advertising campaigns. This is because buyers have an unlimited option when purchasing this type of good and therefore if all goods are the same, the sole reason for buying a product from a specific firm is solely based on price and if the costs of production are the same undercutting rivals will not steal the market share and sales.